Japanese Corporates Hitch Growth

Plans To Southeast Asian

Infrastructure, But Face A Bumpy Ride
Primary Credit Analyst:
Hiroki Shibata, Tokyo (81) 3-4550-8437; hiroki.shibata@standardandpoors.com
Secondary Contacts:
Thomas Jacquot, Sydney (61) 2-9255-9872; thomas.jacquot@standardandpoors.com
Abhishek Dangra, FRM, Singapore +65-6216-1121; abhishek.dangra@standardandpoors.com
Table Of Contents
Japanese Corporates Step Up Pursuit Of Infrastructure Projects, In Keeping
With The Government's Growth Strategy
Power Plants, T&D Facilities, And Land Urban Transit Are Promising Areas
But Remain Low-Profit Businesses
Alliance Among Capital Goods Companies Increases As Competition For
Bids Intensifies
More Sophisticated Risk Management And Expansion Of Operations And
After-Service Business Are Key To Stable Earnings
Southeast Asia Also Struggles To Secure Funding
Given The Challenge Of Finding New Sources Of Funding, Increasing
Tie-ups With Domestic Banks Support Japanese Companies' Quest For
More Projects
Related Criteria And Research
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Japanese Corporates Hitch Growth Plans To
Southeast Asian Infrastructure, But Face A Bumpy
Ride
Southeast Asia urgently needs new investment in infrastructure as mass urbanization spreads across the region. At the
same time, Japan's government is in the middle of a major effort to crank up long-sluggish economic growth. This
confluence is encouraging Japanese companies to pursue development of needed infrastructure in the region.
Infrastructure requirements in Southeast Asia include power plants, transmission and distribution (T&D) facilities, and
intracity transit systems. Such projects are a promising source of income for Japanese corporates at a time when most
domestic technology companies are losing their competitiveness in export-oriented high-tech hardware businesses.
Because infrastructure projects have become larger and more complex, Japanese companies are working together, in
consortium, to secure more contracts in the region. However, Southeast Asia's growing infrastructure business is
attracting plenty of competition from larger Western rivals, which have stronger customer bases and better track
records, and from highly cost-competitive Chinese and Korean rivals. Standard & Poor's Ratings Services thinks
Japanese capital goods companies, core players in consortia, will need to strengthen their risk management systems
and improve their profit margins, with a shift to more stable operational and after-service business from hardware
sales, to offset higher business risk in such projects and maintain their creditworthiness.
Overview
Southeast Asian countries need massive investment in infrastructure as rising populations, increasing
urbanization, and improving living standards outpace existing services.
Rising infrastructure business in the region is key to the Japanese government's growth strategy, and the
government is strengthening its support of Japanese consortia. Japanese capital goods companies, core
players in consortia, are focused on development of needed infrastructure, but Southeast Asia's growing
infrastructure business is attracting plenty of competition from larger Western rivals and highly
cost-competitive Chinese and Korean companies.
We think Japanese capital goods companies need to enhance their risk management systems and raise their
profitability, by increasing stable operational and after-service business, to absorb the potential for higher
losses as infrastructure projects become larger and more complex.
Finding new sources of financing for infrastructure projects, to ease the current heavy reliance on traditional
project loans from key Japanese lender banks, is another challenge for Japanese consortia. While we've seen
signs recently that Japanese pension funds and nonmegabanks aim to enter the market as new funding
providers, we think they will find this a long and difficult process.
Until now, Japanese consortia raised adequate financing in the form of project loans from lender banks, including
Japanese megabanks, and direct lending from export credit agencies (ECAs). However, as funding requirements grow
to meet the demands of larger projects, new regulatory requirements may force key Japanese banks to become more
cautious and restrict funding in the medium term. Consequently, finding new sources of financing would become a
fresh challenge. Recently, we have seen signs that Japanese pension funds and second-tier banks aim to enter the
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market as new funding providers. However, we believe they will find this difficult and will take time to realize their
aspirations. In the meantime, we think Japanese consortia need strong relationships with key Japanese banks to
overcome this challenge and win a constant flow of infrastructure projects in the region.
Japanese Corporates Step Up Pursuit Of Infrastructure Projects, In Keeping
With The Government's Growth Strategy
After more than a decade of continuous deflation and with its current account deficits rising, the Japanese government
in 2013 laid out a road map to growth, and in January 2014 it updated that plan to focus on supporting development of
infrastructure across Southeast Asia, where we expect sustainable economic growth. While domestic growth has
improved mildly since the government unveiled its expansion strategy, Japan's mature economy, aging population,
and declining birth rate demand that it seek new opportunities in the rest of Asia. That was less possible following the
Great East Japan Earthquake in March 2011, as Japanese infrastructure companies, including capital goods
companies, focused on domestic reconstruction. Now, though, as contracts for that work start to dry up, companies
are shifting their resources to look for opportunities in Southeast Asian markets.
As infrastructure projects are increasing in scale and complexity, Japanese companies from various sectors are
partnering up to become more competitive. Key among them are capital goods companies, which include, for
example, those offering power generation, transmission and distribution (T&D) facilities, railway business, and
engineering, procurement and construction (EPC) contracting, and these companies have improved their track records
in Southeast Asia in recent years. Japanese general trading companies (GTCs) are not only equity sponsors but also
EPC contractors in power generation projects. Japan Bank for International Cooperation (JBIC), one of the world's
largest ECAs, plays a role as a project loan provider and a project finance arranger (see table 1 and chart).
Historically, Japan's government has channeled a steady stream of Official Development Assistance (ODA) into
projects in Southeast Asia, leading to good relationships with a number of countries. Under the Japanese government's
growth strategy, increasing business related to ODA and support from government-backed financing schemes could
push Japanese companies to win infrastructure contracts in the region.
Backed by the government growth strategy and their own increasingly good track records and gradually improving
project management capability, several Japanese industrial corporations aim to increase their focus on infrastructure
business with support from the government and lender banks. We forecast that Japanese capital goods companies,
with business and financial support from Japanese-style consortia bringing together a range of Japanese general
trading companies (GTCs), private financial institutions, and ECAs will increase their focus on infrastructure
investment in the region.
We view the following key strengths as supporting Japanese corporations' efforts to step up pursuit of opportunities in
Southeast Asia:
Capital goods companies have innovative technologies combined with proven in-service experience. Even though
their packaged and integrated operational systems remain weak compared with those of Western peer companies,
their energy efficiency, safety, and environmentally friendly technology, particularly in gas turbines, remain
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Japanese Corporates Hitch Growth Plans To Southeast Asian Infrastructure, But Face A Bumpy Ride
advantages. Their technology businesses also give them an edge in some large turnkey projects with sizeable
technology components.
Japanese banks are willing to provide stable financing support. We expect Japanese megabanks to continue to
provide high levels of support for project finance, and the Bank of Japan's policy of monetary easing and very low
interest rates looks set to continue in domestic capital markets. We expect JBIC to continue to provide project loans
and guarantees for many infrastructure projects under the government policy.
Table 1
Key Japanese Stakeholders In Infrastructure Projects
Roles Key Japanese companies
Project sponsors (equity investors), project coordinators, or project contractors
General trading and investment companies
Mitsubishi Corp. Mitsui & Co. Ltd. Sumitomo Corp.
Itochu Corp. Marubeni Corp. Sojitz Corp.
Engineering, procurement, and construction contractors
Capital goods companies
Mitsubishi Heavy Industries Ltd. Toshiba Corp.
Hitachi Ltd. JGC Corp.
Government lender banks
Export credit agency
Japan Bank for International Cooperation
Private lender banks
Megabanks
Bank of Tokyo-Mitsubishi UFJ Ltd. Mizuho Bank Ltd.
Sumitomo Mitsui Banking Corp.
Source: Standard & Poor's 2014.
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Japanese Corporates Hitch Growth Plans To Southeast Asian Infrastructure, But Face A Bumpy Ride
Table 2
Key Infrastructure Data For Japan, ASEAN Countries, And India
ASEAN Countries
Unit As of Japan Indonesia Cambodia Singapore Thailand Philippines Vietnam
Population Mil. 2011 127.8 242.3 14.3 5.2 69.5 94.9 87.8
Area 1,000 km 2011 377.9 1,904.6 181.0 0.7 513.1 300.0 331.1
Norminal GDP Bil. US$ 2011 5,867.2 846.8 12.8 239.7 345.7 224.8 123.6
Railroad Density of
railroad per area
(length of
railroad/area)
km/1,000 km 2011 53.0 1.8(2008) 3.6(2005) N.A. 8.6 1.6(2008) 7.1
Railroad
passenger
volume
(passenger
numbers X
transportation
distance)
Mil.
passengers X
km
2011 244,591 20,283 45(2005) N.A. 7,504 83(2006) 4,571
Railroad
passenger
volume
(passenger
numbers X
transportation
distance)/area
Mil.
passengers X
km/area
2011 647 11 0 N.A. 15 0 14
Railroad freight
volume (freight
weight X
transportation
distance)
Mil. tons X km 2011 20,255 7,166 92(2005) N.A. 2,455 N.A. 4,101
Water Access to safety
water
% 2011 100 84 67 100 96 92 96
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Japanese Corporates Hitch Growth Plans To Southeast Asian Infrastructure, But Face A Bumpy Ride
Table 2
Key Infrastructure Data For Japan, ASEAN Countries, And India (cont.)
Electric
power
Total power
generation
capacity
Mil. kilowatts 2010 287.0 34.1 0.4 10.3 48.2 16.3 15.2
% of renewable
out of total power
generation
% 2010 2.8 3.5 1.6 0.2 1.7 12.3 0.2
% of electric
power availability
out of all
households
% 2010 N.A. 73.0 31.1 100.0 87.7 83.3 97.6
Consumption of
electricity/person
Kilowatt-hours 2010 8,394 641 146 8,307 2,243 643 1,035
Overall Overall
infrastructure
ranking by the
World Economic
Forum
Ranking 2012-2013 11 78 104 2 46 98 95
N.A.--Not available. Sources: Japan Export Trade Organization, Standard & Poor's.
Table 2
Key Infrastructure Data For Japan, ASEAN Countries, And India (Continued)
ASEAN Countries
South
Asia
Unit As of Malaysia Myanmar India
Population Mil. 2011 28.9 48.3 1,241.5
Area 1,000 km 2011 330.8 676.6 3,287.3
Norminal GDP Bil. US$ 2011 287.9 51.4 1,872.8
Railroad Density of railroad per area (length of
railroad/area)
km/1,000 km 2011 5.0 N.A. 19.5
Railroad passenger volume (passenger numbers X
transportation distance)
Mil. passengers X km 2011 965 4,163 978,508
Railroad passenger volume (passenger numbers X
transportation distance)/area
Mil. passengers X
km/area
2011 3 6 298
Railroad freight volume (freight weight X
transportation distance)
Mil. tons X km 2011 1,535 885(2006) 625,723
Water Access to safety water % 2011 100.0 84.0 92.0
Electric
power
Total power generation capacity Mil. kilowatts 2010 25.4 1.7 208.1
% of renewable out of total power generation % 2010 0.0 0.0 7.5
% of electric power availability out of all
households
% 2010 99.4 48.8 75.0
Consumption of electricity/person Kilowatt-hours 2010 4,117 131 616
Overall Overall infrastructure ranking by the World
Economic Forum
Ranking 2012-2013 32 N.A. 84
N.A.--Not available. Sources: Japan Export Trade Organization, Standard & Poor's.
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Japanese Corporates Hitch Growth Plans To Southeast Asian Infrastructure, But Face A Bumpy Ride
Power Plants, T&D Facilities, And Land Urban Transit Are Promising Areas But
Remain Low-Profit Businesses
Some US$8 trillion in new infrastructure will be needed in Asia between 2010 and 2020 as a result of rising
populations, increasing urbanization, and improving living standards, according to Asia Development Bank estimates.
Electric utilities account for about 50% of these needs, and the transportation sector makes up some 30% more (see
tables 2, 3, and 4). The International Energy Agency (IEA) forecasts that Asia-Pacific nations will consume
two-and-a-half times more electricity in 2035 than in 2010. Along with more power plants will come a need for more
T&D facilities. Asian countries most in need of new power generation are Indonesia, Thailand, and the Philippines,
where power shortages are common. Myanmar is also a new market that many Japanese corporations aim to enter.
Japan-based capital goods companies, including Mitsubishi Heavy Industries Ltd. (MHI), Toshiba Corp., and Hitachi
Ltd., have worked with Japanese GTCs and financial institutions to deliver many independent power producer (IPP)
projects across Asia (see table 5). These capital goods companies have relatively good records in the sector, supported
by technological advantages and good relationships with local governments and companies across the region.
Japanese GTCs, including Marubeni Corp., Mitsubishi Corp., Mitsui & Co. Ltd., and Sumitomo Corp., have proven
track records as project sponsors in the region and EPC contractors in the IPP business, accumulating expertise in
finding new projects, originating structured finance transactions, negotiating electricity trading contracts, and selling
electricity in emerging markets, some of which they have achieved through alliances with major overseas
manufacturers. Accordingly, we expect IPP business in the region to remain a promising area for these capital goods
companies and GTCs.
We forecast that urban intracity transit in the region, rather than risky long-distance intercity projects with civil works
for land development, is another promising area for Japanese capital goods companies. A number of Southeast Asian
governments are progressing plans to ease traffic jams in metropolitan areas with mass rapid transit systems and
high-speed railways. MHI won orders for transportation systems from Singapore, Malaysia, and Indonesia in 2012 and
2013. The company has taken advantage of its strong project management system and engineering capabilities based
on extensive experience to deliver transportation systems to customers. In 2013, Hitachi won a contract to construct
Vietnam's first urban railway.
From a credit perspective, our assessments of country risk for the rated Japanese capital goods companies are unlikely
to change substantially in the next one to two years, because we expect operations in Southeast Asia, after increasing
steadily in recent years, to continue to account for about 10% of their total profits. The companies have adequately
managed their regional diversification to date, in our view. However, we estimate that projects in the region reap lower
EBITDA margins than the roughly 10% these companies make on their overall businesses. This is mainly due to losses
on some projects as a result of cost overruns and high cost structures. With European giants such as Germany-based
Siemens AG, Switzerland-based ABB Ltd., and France-based Alstom S.A. making overall EBITDA margins of
10%-15%, we think Japanese capital goods companies should operate at EBITDA margins of at least 10% in oversea
markets given higher country risk there than in domestic markets. Having said this, our estimate that projects in
Southeast Asia account for less than 10% of the outstanding debt of Japanese capital goods companies leads us to
believe that increased business in the region will have limited impact on their cash flow adequacy, as measured by
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Japanese Corporates Hitch Growth Plans To Southeast Asian Infrastructure, But Face A Bumpy Ride
ratios such as funds from operations to debt, over the next one to two years.
GTCs have secured relatively stable profits from business in South East Asia, and their investments in infrastructure
business are relatively well diversified and reasonably small compared with their net income and equity. We take a
view that risk management systems these companies employ work adequately at this stage and we can expect stable
profits over the next one to two years. If these companies adopt more aggressive investment policies, we think their
credit quality would come under downward pressure.
Table 3
Infrastructure Market Projections By Sector (2010-2020) (Tril. US$)
Sector Estimated total amount Share
Electric power 4.1 51%
Transportation 2.5 31%
Telecommunications 1.1 14%
Water, others. 0.4 5%
Sources: Thomson Reuters, Asian Development Bank.
Table 4
Japan Bank for International Cooperations Loan Commitments By Sector
Sector Share
Power and water 36%
Shipping 8%
Oil and gas (liquified natural gas) 30%
Mining 10%
Refining, petrochemicals 10%
Others 6%
Source: JBIC.
Table 5
Key Recent Projects For Japanese Companies In Southeast Asia
Contracted
or
announced
year Sector Country
Key project
sponsors (equity
investors), project
contractors, or
project
coordinators
Export
credit
agency
Key private
lender banks
Key
operators
and EPC
companies
Total
contracted/project
budget (Bil. US$)
2014 Power plant
(coal-fired,
2,000MW)
Malaysia Mitsui & Co. Ltd.,
Malaysian
government-owned
fund
-- -- IHI Corp.,
Toshiba Corp.,
Hyundai
Engineering
Co. Ltd.,
Hyundai
Engineering &
Construction
Co. Ltd.
About 3.3
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Japanese Corporates Hitch Growth Plans To Southeast Asian Infrastructure, But Face A Bumpy Ride
Table 5
Key Recent Projects For Japanese Companies In Southeast Asia (cont.)
2014 Pagbilao
power plant
(coal-fired,
388MW
expansion )
Philippines Marubeni Corp.,
Tokyo Electric
Power Co. Inc.
(TEPCO), many
local companies
-- -- Mitsubishi
Hitachi Power
Systems Ltd.,
Korea-based
Daelim
Industrial Co.
Ltd.
About 1.0
2014 Power plant
(coal-fired,
100 MW) and
transmission
assets
Cambodia Marubeni Corp.,
Leader Group
(Malaysia)
-- -- -- --
2014 Thai Binh
power plant
(coal-fired ,
600MW)
Vietnam Marubeni Corp. -- Japanese overseas
development aid
(ODA)
Marubeni
Corp., Fuji
Electric Co.
Ltd.,
U.S.-based
Foster
Wheeler AG
About 0.9
2014 Power plant
(coal-fired,
110MW)
Philippines Mitsubishi Corp. -- -- Local
companies,
Toshiba Corp.
About 0.3
2013 Khanom 4
power plant
(gas-fired
combined
cycle,
970MW)
Thailand Mitsubishi Corp.,
TEPCO, others
Japan Bank
for
International
Cooperation
(JBIC)
TEPCO --
2013 Power plant
(coal-fired,
1,200MW)
Vietnam Mitsubishi Corp. -- -- Korea-based
Doosan Heavy
Industries &
Construction
Co. Ltd.
--
2013 Manjung
power plant
(coal-fired,
1,000MW)
Malaysia Sumitomo Corp. -- -- Korea-based
Daelim
Industrial Co.
Ltd., Hitachi
Ltd. group
About 1.3
2013 Power plant
(gas-fired
combined
cycle,
850MW)
Thailand Sumitomo Corp. -- -- Swiss-based
Alstom S.A.
group
About 0.5
2013 Railroad
(Bangkok
purple line
rail
construction
project,
supply of rail
systems)
Thailand Marubeni Corp.,
Toshiba Corp.
-- Japanese ODA Toshiba Corp.,
Marubeni
Corp., East
Japan Railway
Co., others
--
2013 Airport
operation
(Mandalay
International
Airport)
Myanmer Public-private
partnership
-- -- Mitsubishi
Corp.
--
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Japanese Corporates Hitch Growth Plans To Southeast Asian Infrastructure, But Face A Bumpy Ride
Table 5
Key Recent Projects For Japanese Companies In Southeast Asia (cont.)
2012 Utai power
plant
(gas-fired
combined
cycle,
1,600MW)
Thailand Electric Power
Development Co.
Ltd.
JBIC Bank of
Tokyo-Mitsubishi
UFJ Ltd.,
Sumitomo Mitsui
Banking Corp.,
Asia Development
Bank, others
Electric Power
Development
Co. Ltd.,
Mitsubishi
Heavy
Industries Ltd.
--
2012 Power plant
(thermal,
1,200MW)
Vietnam Sojitz Corp. -- Japanese ODA Toshiba Corp.,
Daelim
Industrial Co.
Ltd.
About 0.8
2012 Railroad (Ho
Chi Minh
metro line 1)
Vietnam Sumitomo Corp.,
local company
-- Japanese ODA Local
companies
About 0.6
2012 Railroad
(Manila mass
rapid transit
7th route)
Philippines Marubeni Corp.,
local company
JBIC -- Japan
Transport
Engineering
Company,
Toshiba Corp.,
others
About 1.0
[--] Unclear or not disclosed information. Sources: Individual companies, Standard & Poor's.
Alliance Among Capital Goods Companies Increases As Competition For Bids
Intensifies
We expect Japanese companies to confront a steeper path to winning more infrastructure projects in the region within
several years because of more intense competition not only from global giants with strong customer bases but also
from emerging rivals from South Korea and China, which have very cost-competitive EPC contractors whose orders
have grown with the support of their governments.
Amid such challenging business conditions, Japanese capital goods companies aim to strengthen their global
competitiveness with tie-ups and M&As. For example, Hitachi and MHI have merged their thermal power generation
systems businesses through a new joint-venture corporation they launched in February 2014. The joint venture has a
target of 1.3 trillion in sales in fiscal 2014 (ending March 31, 2015). Toshiba and General Electric Co. (GE) also forged
a tie-up in the thermal power business in 2013. With the shale gas revolution set to spread, we forecast global prices
for natural gas will remain low for the long term. As a result, we expect use of high-efficiency gas-turbine
combined-cycle power plants to increase steadily. We take a view that MHI's advantage in high-efficiency and
environmentally friendly technology will remain key to the competitiveness of the new joint venture.
We see a similar trend in the urban transit business. For example, MHI and Hitachi have won orders for projects in the
region in recent years. However, since the business each company has generated is small in reach and scale compared
with that of European giants, including Siemens and Alstom, we forecast that Japanese capital goods companies, MHI
and Hitachi included, will strengthen their business tie-ups in the transportation business as we have seen them do in
the thermal power business.
Furthermore, recently we have witnessed plenty of M&A activity among capital goods companies in the global market.
GE fought off competition from a Siemens-MHI joint bid for Alstom's power business. Global competition is
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Japanese Corporates Hitch Growth Plans To Southeast Asian Infrastructure, But Face A Bumpy Ride
intensifying in the power plants, T&D, and railroad businesses, and the competitive environment in Asia may change
substantially. This could force Japanese capital goods companies to rethink their business strategies, in our view.
More Sophisticated Risk Management And Expansion Of Operations And
After-Service Business Are Key To Stable Earnings
Given the business environment outlined above, we view strengthened project risk management as crucial for
Japanese capital goods companies if they are to secure stable profits in the infrastructure business in Southeast Asia.
Although we have seen recent improvements in capital goods companies' risk management systems as infrastructure
projects have become larger and more complex, we believe the companies will need to become even more
sophisticated about risk management, particularly in the following areas:
Improving contract negotiations to minimize potential risks related to inflation in host countries, changing demand
projections, and cost overruns on civil works for land development;
Strengthening systems and information networks to temper the risk of political change in host countries; and
Minimizing cost overruns and delays on individual projects and managing their payback periods to collect on
investment.
From a credit perspective, we take a conservative view that Japanese capital goods companies' attempts to enter new
fields or use new technologies may lead to cost overruns even if the key contractor has a good record in proven
technology. Furthermore, larger and more complex projects may require an additional investment burden and
lengthen the payback period, and failing to ensure the payback period is manageable could hurt a consortium's
financial profile. Political risks exist, too.
We take a view that Japanese capital goods companies need to strengthen their alliances with host countries and local
partners to ensure projects are feasible. In our view, a key factor for project feasibility will be establishment of strong
relationships with experienced government agencies like JBIC. This is crucial to risk management in the event that
operational problems cause financial stress in a project, because the project consortium would need to negotiate at
length with local governments and various stakeholders. In addition, we expect Japanese capital goods companies to
expand their alliances with leading global firms, which have sufficient expertise and experience in winning contracts,
managing projects, and collecting on investment in emerging markets.
Most of the projects that Japanese capital goods companies have won are hardware-intensive, for which competition
on price is fierce. This leads to volatility in their profit levels, and in some cases large projects are unable to absorb the
additional expense of cost overruns. In our view, a swift shift to a business model focused on provision of services,
such as after-business maintenance and operation systems, is critical for companies if they are to absorb unpredictable
losses and secure stable profits in their power plant and urban transit improvement projects.
Southeast Asia Also Struggles To Secure Funding
In the past five years, most infrastructure financing in Asia has come from regional domestic banks in countries where
projects take place, as well as from government financing programs and project loans from local banks. Such heavy
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Japanese Corporates Hitch Growth Plans To Southeast Asian Infrastructure, But Face A Bumpy Ride
dependence on loans for funding infrastructure projects is less prevalent in U.S. or European markets, which have
better access to capital. As infrastructure projects have grown larger, funding requirements have also increased. In
response, governments in the region are striving to improve and strengthen their financial markets, and local investors
new to investing in domestic infrastructure markets are increasing in number gradually.
For instance, Singapore is pushing forward with initiatives to establish itself as a hub for infrastructure funding in Asia.
Malaysia has pioneered expansion of an Islamic finance market, or "sukuk," that it views as a new funding market in
Asia. In these countries, we see governments helping foster attractive investment climates. Furthermore, in the
Philippines, the state-owned social security fund is investing in the domestic stock market. Key to these governments'
efforts to improve and strengthen their financial markets is consistent application of regulations, because it provides
certainty for infrastructure projects.
However, in reality, beyond a handful of active governments and sectors, infrastructure project financing in Southeast
Asia remains underdeveloped and underserved.
Given The Challenge Of Finding New Sources Of Funding, Increasing Tie-ups
With Domestic Banks Support Japanese Companies' Quest For More Projects
JBIC, one of the world's largest ECAs, has increased its support of Japanese companies by financing many projects,
including power plant projects in Indonesia and Thailand. Under Japan's growth strategy, JBIC is likely to continue to
play a key role in financing consortia that Japanese corporations assemble for infrastructure projects in Southeast Asia,
in order to meet the expectations of sponsors in host countries who want to forge alliances with overseas business
partners that have the ability to source sufficient funding, in our view.
Japanese megabanks, which seek better returns than they get on domestic corporate loans, have actively extended
loans to overseas projects (see table 6). We believe Japanese megabanks have been in a good position to supply
project loans to the Southeast Asian infrastructure market because the global financial crisis that broke out in 2008 and
the subsequent European debt crisis affected them less than they did European banks.
However, we expect the pace of cross-border lending for project finance by Japan's three megabanks, Bank of
Tokyo-Mitsubishi UFJ Ltd., Mizuho Bank Ltd., and Sumitomo Mitsui Banking Corp., to slow in the next three to five
years. Higher capital requirements set to be phased into the global banking system by 2019 (particularly, the capital
conservation buffer) under the Basel III accord may seriously affect the ability of systematically important financial
institutions, including the Japanese megabanks, to provide credit; current common equity Tier 1 capital ratios (on a
fully applied basis) among Japanese banks are not particularly high by international standards; and further global
regulations may be introduced on gone-concern loss-absorbing capacity (GCLAC). These measures may hinder growth
in overseas lending.
Table 6
Biggest Issuers Of Global Project Loans in 2013
Ranking in 2013 Ranking in 2012 Lead arranger Country Market share in 2013 Market share in 2012
1 2 State Bank of India India 6.5% 5.1%
2 1 Bank of Tokyo-Mitsubishi UFJ Ltd. Japan 5.7% 5.5%
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Table 6
Biggest Issuers Of Global Project Loans in 2013 (cont.)
3 46 China Development Bank Corp. China 4.7% 0.5%
4 3 Sumitomo Mitsui Banking Corp. Japan 4.3% 3.8%
5 4 Mizuho Bank Ltd. Japan 3.4% 3.2%
6 7 Credit Agricole S.A. France 2.4% 2.2%
7 40 Barclays Capital Inc. U.K. 2.1% 0.6%
8 6 HSBC Bank PLC U.K. 2.1% 1.9%
9 15 National Australia Bank Ltd. Australia 2.0% 1.4%
10 13 Commonwealth Bank of Australia Australia 1.9% 1.5%
Source: Thomson Reuters.
As financing requirements for larger projects grow, we expect new Japanese investors or financial institutions to plug
the funding gap Japanese megabanks are unable to fill. For example, Japan's 130 trillion Government Pension
Investment Fund, the nation's largest pension fund, is considering a new policy of investing in infrastructure funds.
Through this new investment, some money may enter Southeast Asian infrastructure markets. Such a step may trigger
changes in the investment policies of other Japanese pension funds. Moreover, funding through project bonds, which
are common in U.S. and European markets, is now under consideration in Japan's capital markets. While we consider
project bonds a good option for infrastructure because of a suitable fit with their key characteristics, including
long-term durations, large transaction sizes, and diverse funding sources, we think Japanese investors, including
nonmegabanks, will take a long time to invest in them because of their lack of ability in credit analysis and the absence
of a mark-to-market pricing system.
Infrastructure business in the region is one of few promising areas where Japanese capital goods companies can act on
their strengths. We expect the ability of Japanese banks to provide stable funding in the region to remain a key
advantage for Japan's capital goods companies and infrastructure-related business. If this advantage can be
maintained, the infrastructure business in Southeast Asia may become a growth area for Japanese capital goods
companies.
Related Criteria And Research
Related Criteria
Project Finance Construction And Operations Counterparty Methodology, Dec. 20, 2011
Related Research
Why Global Investors Aren't Making Inroads Into Infrastructure Funding In Asia, Jan. 29, 2014
Global Infrastructure: How To Fill A $500 Billion Hole, Jan. 16, 2014
Japanese Banks' Efforts To Boost Overseas Expansion Are Delivering Mixed Results, Oct. 21, 2013
Japans Major Banks Chase Growth Overseas To Offset Flagging Profitability At Home, July 30, 2012
Risk Management Essential As Japan's Heavy Industry Makers Grapple With Overseas Expansion, Jan. 20, 2011
Financing Asia's Infrastructure Gap, March 1, 2011
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Japanese Corporates Hitch Growth Plans To Southeast Asian Infrastructure, But Face A Bumpy Ride
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